The IMF predicament

It has been 5 years since the first intervention of the IMF in Indonesia in October 1997. Based on its prescription the structural adjustment program (SAP) devised to assist Indonesia in its recovery from the severe economic crises, the IMF has dictated its policies to the government using the sacred vows of the Letter of Intent (LoI) and Memorandum of Economic & Financial Policy.

However, both the prescription and the mantras do not seem to be working properly. Indonesia is further trapped into deeper debt. Worse still, under the SAP, which introduced policies like import liberalisation, free money regime, devaluation, monetary & fiscal contraction and foreign investment, the Neo-Liberal economics has flushed away local economies by minimising government’s roles, facilitating foreign investment and promoting privatisation and trade liberalisation without any protection.

The economy has been stranded in a no-way-out situation that leads to the very serious question of whether the IMF prescription is efficacious.

Yet, this is a fact. On June 12, the Coordinating Minister for the Economy Dorodjatun Kuntjoro-Jakti, without consulting the legislature, extended the LoI until December 2003. It simply means that we are going to be more deeply trapped in debt we can never pay.

State Minister of National Development Planning, Kwik Kian Gie, angrily expressed his fears that Indonesia will never be able to emerge from the crises and pay its international debt, which has reached Rp 700 trillion (US$ 71.4 billion) –and which will grow under this LOI extension.

The world has changed so dramatically in the last half century that it is nearly impossible to believe that only four decades ago the newly emerging colonies of Africa and Asia were joining with their brethren in Latin America to push for a New International Economic Order (NIEO).

Galvanised by centuries-old colonial injustices and sparked by the radical ideas of such men as Sukarno in Indonesia, Gandhi in India, Nkrumah in Ghana, Fanon in Algeria, Nyerere in Tanzania and Castro in Cuba, these Third World nations set out to challenge the entrenched power of the United States and Western Europe.

The NIEO was a collection of progressive intellectuals and politicians who believed that, left on their own, free markets would never reduce global inequalities. These leaders argued for improved terms of trade and a more just international economic system.

These developing countries fought for fairer terms of trade and pushed their case through producer cartels like OPEC and UN by forming the Group 77, which was instrumental in establishing the UN Conference on Trade and Development (UNCTAD).

But when Petrodollars flooded Northern financial centers, President Nixon floated the dollar, sabotaging the Bretton Woods fixed exchange-rate system. The Third World debt expanded and the IMF and World Bank bailed out debt-strapped nations. Yet, in return these nations had to adopt structural adjustment policies which favour cheap exports and spread poverty throughout the South, including Indonesia

Indonesia saw its Rupiah devalued to an actual 400 per cent, making it impossible to pay the debt. The debt has therefore been rescheduled through the groups of donors in the Paris Club and London Club. Yet, one condition for rescheduling applies. It is the LOI, which also becomes a precondition in getting support from other financial institutions like the Consultative Group on Indonesia, the Asia Development Bank and the World Bank.

If the debt payment is not rescheduled, the national budget will surely swell because of deficit. And if we renege from the obligation to pay the debt, we will be shunned by international businesses. Even without being ‘watched’ or ‘controlled’ by the IMF, Indonesia is reluctant to commit itself to reform and transparency. But for the IMF, this also means a way to impose liberalisation through the SAP.

Unfortunately, we have little choice – and we are bankrupt. So what’s wrong with an IMF prescription?

Together with the WB, the IMF launched a policy to structurally adjust the Third World by deflating economies and demanding a withdrawal of government –not only from public enterprise but also from compassionate support of the basic health and welfare of the most vulnerable. Exports to earn foreign exchange were privileged over basic necessities, food production and other goods for domestic use.

In 1986 IMF set up its first formal Structural Adjustment Facility, followed by the World Bank in 1989 by having contracted adjustment loans to 75 per cent of the countries that already had similar IMF loans in place.

The Bank’s conditions both extended and reinforced the IMF prescription for financial liberalisation and open markets. They included privatising state-owned enterprises, massive public sector layoffs, cutting basic social services and subsidies on basic foodstuffs, and reducing trade barriers.

In Indonesia, one of the policies imposed by the IMF is a bailout for banks’ debt, which transforms private debt into public debt under the responsibility of the government, which has to issue obligation letters. This domestic debt, which is Rp 164.53 trillion, in addition to debt-guarantee certificates worth Rp 53.77 trillion –most of which has been corrupted—has to be paid annually. And it is taken from 36% allocation of the state-budget (APBN), or the people’s money.

Marooned in this vicious circle, the IMF prescriptions look great and it seems to have been the right choice to hand over the economy to the market. But as the market says, there is no such thing as a free lunch. So, probably the neck-strangling debt we have now is the price we have to pay.